The Algorithmic Advantage

Detailed write up on how institutions trade differently: https://www.algoadvantage.io/podcast/046-tom-starke/Part 2: coming soon!Dr Tom Starke trades significant institutional capital as a quant trader for a private fund. In Part 1, we cover the common pitfalls of 'retail' or newer traders. Tom makes the case that institutions 'think differently', applying an extra dimension to their thinking, as compared to retail traders. A significant result of this is the critical role a systematic R&D process plays in strategy development. The development pipeline is a 'research first', 'hypothesis testing' laboratory, designed to invalidate bad ideas quickly, and push viable ideas through a strict robustness testing framework to ensure out-of-sample results. Applying a scientific approach (which is just good data science), means letting the data speak, rather than squeezing it for the answers we want! The result is a process designed to minimize overfitting and produce the highest risk-adjusted returns for the pre-defined objectives.Courses, Community & More: https://algoadvantage.ioContents:0:00 Introduction to Systematic Trading and Research6:47 Tom Stark’s Journey: From Physics to Trading13:16 The Scientific Approach: Pros and Cons in Trading19:30 Avoiding Analysis Paralysis in Quant Trading26:02 The Transition: Retail vs Institutional Trading32:28 The Motivation Behind Teaching and Mentoring Traders38:04 Mindset Shifts: From Retail to Institutional Thinking44:34 Risk Management: How Institutions Approach Risk51:08 Defining Trading Objectives: A Key Starting Point57:06 Portfolio Construction: Balancing Risk and Return1:03:10 Diversification: The Key to Long-Term Success1:09:30 Position Sizing: Crucial for Strategy Success1:15:00 Machine Learning’s Role in Systematic Trading1:21:10 Python: The Essential Tool for Quantitative Research1:27:00 Back-testing and Strategy Evaluation: Avoiding Overfitting

Rob Hanna, a seasoned quantitative trader and founder of Quantifiable Edges, dives into his evolution from discretionary trading to systematic strategies. He discusses the vital role of VIX trading in hedging against market crises, emphasizing the importance of the futures curve in his models. Rob shares insights on mean-reversion strategies, managing tail risks, and the intricacies of backtesting VIX options. From employing diverse models to navigating sector exposure, his extensive experience offers valuable lessons for traders looking to optimize their portfolios.

In this enlightening discussion, Nick Radge, an experienced Australian systematic trader and founder of The Chartist, shares his insights on trading psychology and strategy. He highlights the importance of robust, momentum-driven systems and discusses the pro versus amateur mindset in trading. Nick delves into his shift from futures to equities, his nine long-only strategies, and the crucial concept of sequence risk, especially as one approaches retirement. He emphasizes patience and the need to stick to one’s process to capture outliers and long-term gains.

Brent Penfold, an experienced futures trader and strategy developer with over 40 years in the markets, discusses timeless trading wisdom. He argues that simple, historical strategies can yield consistent returns today. Brent highlights the importance of diversification and disciplined portfolio management across 30 futures markets with diverse models. He shares insights into emotional trading biases, the transition from discretionary to mechanical trading, and the role of trend versus mean reversion strategies, all aimed at building robust, efficient trading systems.

Laurens Bensdorp, an architect of innovative portfolios and author of 'Trading Retirement Accounts', shares his expertise on systematic trading. He discusses the importance of combining strategies like trend following and mean reversion to create robust portfolios. Listeners will learn about Parrondo's paradox, which reveals how mixing losing investments can yield positive outcomes. Laurens emphasizes capital allocation, the dangers of over-optimization, and the necessity of maintaining diverse strategies for resilience amid market fluctuations.

Cesar Alvarez, a veteran quantitative trader and founder of Alvarez Quant Trading, shares his profound journey from discretionary to systematic trading. He discusses innovative mean reversion strategies and the importance of adaptability in volatile markets. Alvarez reveals his dynamic portfolio management techniques, including tactical ETF strategies and when to retire ineffective trading methods. He also emphasizes using robust testing to avoid overfitting, making this a treasure trove for systematic traders seeking practical insights.

Pavel Kycek from Robuxio, an expert in quantitative crypto trading, shares his insights on generating impressive returns through innovative portfolio strategies. He discusses blending mean reversion and momentum techniques while managing the volatility inherent to crypto markets. Pavel emphasizes the significance of robust trading systems and adaptable strategies for navigating market complexities. He also touches on the contrast between sustainable investments like Bitcoin and speculative altcoins, providing listeners with a deeper understanding of the crypto landscape.

Brett Steenbarger, a psychologist and performance coach for traders, reveals how mindset significantly impacts quantitative trading. He argues that emotional factors and creativity are critical for success, likening systematic trading to a Formula 1 pit crew that balances precision with real-time adaptability. The conversation dives into the debate of nature versus nurture in trading skills, the importance of teamwork, and the necessity of self-reflection for improvement. Steenbarger also emphasizes fostering creativity to enhance trading strategies, cautioning against the risks of complacency.

Andrea Unger, a four-time World Trading Champion, shares insights from his impressive journey, including a jaw-dropping 672% return during a trading competition. He emphasizes the importance of robust trading strategies, risk management, and adapting to market changes. Unger discusses the evolving world of systematic trading, the complexities of trading strategies, and how account size can affect performance. He also dives into the intricacies of backtesting and portfolio construction, providing a masterclass in navigating the dynamic futures market.

Kevin Davey, a systematic trader with expertise in quantitative testing and strategy design, dives into trading frameworks for consistency and longevity. He emphasizes the importance of walk forward analysis and its role in refining strategies while avoiding overfitting. The discussion highlights risk management, psychological preparedness, and technology's impact on portfolio construction. Davey shares personal insights, including the necessity of tenacity and continuous learning, making a case for diversified algorithmic trading over discretionary methods.